Why is the G8 Silent On the U.S. Dollar?

As to the question of the status of the highly scrutinized U.S. dollar, the Group of Eight has not yet come forth with a response of any substance. The three-day Group of Eight summit came to a close on the 10th, and as to the question of the U.S. dollar, reserve currencies or exchange rates, the official releases did not say a word. Each country merely expressed that they were in agreement to push forward a stable and functionally sound international system and avoid competitive currency devaluation.

Following the eruption of the financial crisis, the international community began to raise major suspicions about the status of the U.S. dollar as reserve and settlement currency. Suddenly there were intense cries calling to use the euro, create a new super-currency or even use the Chinese yuan as a substitute for the dollar. Even so, the reality of the situation proved that these voices were merely coming from the people standing on the sidelines, as their views never made their way into the mainstream.

From the G20 financial summit of mid-November of last year; to the Russian held BRIC conference; even up to this most recent meeting of the Group of Eight, along with the leaders of developing nations, there has been one common phenomenon: prior to the meetings the question of the status of the U.S. dollar is hot on everyone’s lips and there are strong demands made for replacement of the U.S. dollar as reserve and international settlement currency.

Furthermore, there are continuous demands for the euro, the yuan or even for the creation of a new super-currency to gradually replace the U.S. dollar. But then the funny thing is, every time, once the meetings have convened, the voices making these requests turn to utter silence and the status of the U.S. dollar doesn’t even make the agenda – and as was just seen following the last G8 meeting, not a word is spoken. What is even more hilarious is that Russia – the most vocal advocate of the creation of a new super-currency to replace the U.S. dollar – completely avoided the topic during the BRIC conference hosted in Yekaterinburg, Russia.

So basically what is going on is that the financial crisis has set in, but the structure of the eight countries that dictate the world economy have seen no fundamental change; and the United States – the silverback in the group of eight nations and the world political-economic leader – is not budging from its position. As far as the Group of Eight is concerned, the U.S. dollar can serve them all very well as the reserve currency; and in fact, it is the U.S. dollar that has united them into one body of eight nations with a common interest. In this present scenario, to expect that the Group of Eight and the Western nations that hold these world-class conferences will downgrade the status of the U.S. dollar is completely absurd.

There are those that say that the U.S. dollar is a hindrance to the world; but in fact a more accurate assessment would be that the U.S. dollar is a hindrance to emerging markets and developing nations. European nations, as well as Japan, follow up every fluctuation and adjustment of the U.S. dollar with fierce currency policies. It doesn’t matter if the dollar is on its way north or south, for the Western nations the effects of the change can be neutralized. On the other hand, the economies of emerging markets and developing nations all rely on natural resources or inexpensive labor to prop themselves up, which creates a major trade imbalance and increased foreign exchange surplus.

When the U.S. dollar rises, it leads to a continuous expansion of trade imbalance and growth in instability. When the dollar declines, it leads to a substantial reduction in the value of the vast foreign exchange reserves, which equates to a plundering at the hand of the United States. The reality of the situation is that the economies of emerging markets and developing nations have fallen into the “U.S. dollar pitfall.” And after all, this pit was dug out by the Western world, and is what they hoped for, so how could they downgrade the status of the dollar on their own accord?

Even though the economies of emerging markets have experienced major growth and their volume in global trade is getting bigger and bigger, in comparison to the United States there is still a major divide, and they have a long road ahead. And it is for this reason that in the short term, regardless of what type of currency it is, it won’t cause the U.S. dollar to give up its status. Consequently it is of no use to waste any more energy, and it is unnecessary to blindly call out and blindly stir up public debate.

What emerging markets, especially China, need to do is make the decision to adjust and reform their economic growth patterns and put a great effort into starting up domestic consumption. They need to gradually improve the situation of heavy exportation and light consumption. There need be no haste with the exportation of the Chinese yuan. Wait until China’s international trade surpasses that of the United States. At that time, it will become very difficult for the Chinese yuan not to become an international currency and replace the U.S. dollar.